We Need the Legal Entity Identifier

: on 25 October 2019

I attended a Global Legal Entity Identifier Foundation (GLEIF)/Data Coalition event on October

24: “GLEIF Washington Forum: Accelerating into a Digital Future: Simplifying Entity

Identification for the Digital Age”. If you are unfamiliar with the LEI, this is what GLEIF says

about LEI:

“The Legal Entity Identifier (LEI) is a 20-character, alpha-numeric code based on the ISO 17442

standard developed by the International Organization for Standardization (ISO). It connects to

key reference information that enables clear and unique identification of legal entities

participating in financial transactions. Each LEI contains information about an entity’s ownership

structure and thus answers the questions of 'who is who’ and ‘who owns whom’. Simply put, the

publicly available LEI data pool can be regarded as a global directory, which greatly enhances

transparency in the global marketplace.”

So unlike a tax number or stock ticker or other common shortcuts for an organization’s identity,

LEI seeks to create a unique fingerprint independent of region or purpose or characteristic.

Here’s Magna Internationals’ LEI: 95RWVLFZX6VGDZNNTN43. There are ultimately 14 entities

reporting up to that entity. I know this from a very useful search tool at

https://search.gleif.org/#/search/ .

I have included this information in the midst of my “original goals for XBRL” series even though

it directly wasn’t an original goal, although accountability through digital signatures was.

However, the power of data with a “laser pointer” at an organization permeates the business

reporting supply chain.

I have two legacy situations - one at the detailed level and one at the reporting level - where the

pervasive use of such a fingerprint could be powerful. The newer situation, of course, is

blockchain. If we want auditability and traceability, we don’t want to have ambiguity in

identification. I’m imagining there may even be ways to create hashes of the LEI for one way

proveability.

Anyway, for XBRL GL, one of the early success stories was an early adopter who used XBRL

GL to make the output of different accounts payable systems more comparable. Using a

common coding system for the vendor number from the start (e.g, LEI) would make this

identification child’s play.

The other is an older vision of mine not yet realized. The importance of certain relationships with

a reporting company are pretty well known. Related party transactions are one area. Another is

major customers. The latter resonated with me.

Image if all major customer disclosures identified the customer with the LEI. You would instantly

have an unambiguous, analyzable network of interrelationships. Is there a disaster that will

impact companies in a specific region directly? You will now be able to unambiguously trace the

impact one, two, three steps away. Is an industry failing? You will now be able to trace the

potential impact on those organizations that thrived with those parties as customers.

Finding company - and intercompany - data with laser accuracy appears to be on its way. Some

very powerful stories were shared in DC.

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Data Driven Sustainability Decisions

Tuesday, 03 May 2022

Gerald Trites, FCA, CISA

While companies have traditionally viewed sustainability decisions as separate from monetary decisions, this is changing. It’s partly because of generational changes, with millennials now being the largest component of the workplace and partly considerations driven by customer demand, investor demand regulatory requirement and common-sense observation of the destruction caused by climate change. Compelling reasons.

Companies have been moving more clearly to data driven decision making for several years. So it makes sense they would turn to data to drive their decisions in the sustainability area.

To accomplish this, they need to first define their sustainability goals. This usually begins with industry trends and information from stakeholders about their sustainability concerns and the development of a sustainability strategic plan. Second, begins the process of data modelling and analysis drawn from internal and external sources. Many organizations have well defined data gathering processes already in place, but these need to be modified to take into account sustainability goals. Finally, the adoption of data driven sustainability decision making requires the adoption of AI techniques to automate data gathering, modelling and reporting functions.

Established enterprise systems are moving in this direction, the availability of which, as well as their compatibility with existing systems, is an important consideration.

Overall, a creative combination of data management, analytics, AI and integration of sustainability processes with established corporate processes are crucial to a successful outcome – the creation of a truly sustainable enterprise.

How All Accounting Reports Will be Digitized

Thursday, 31 March 2022

Gerald Trites, FCA

The SEC was the major regulatory body that got the ball rolling in 2009, when it mandated rules for the use of the interactive data format (XBRL) for public company financial statements. Then several other countries and organizations got on the band wagon. There was a relatively quiet period for a few years, when the new electronic form of reporting seemed stalled. But then the EU stepped in and began requiring their ESEF filings in 2021. That meant most of the major companies in the world were using digitized reporting.

For regulators and governments, digital filing of reports has been an opportunity to streamline the processing and analysis of the reports. Users such as investors, on the other hand, have often been unsure about what to do with these reports.

The fact is, much attention has been given in recent years to the production of digital reports, but very little given to their consumption. True, there are utilities that can be purchased to enable people to read reports in digitized form, the SEC provides such a one, and the recent moves to inline XBRL mean the reports can be read in the conventional way, (ESEF is a variation on inline XBRL). But most of these attempts to render digital reports readable cater to the idea of sequential reading in the conventional sense. Most people do not read this way, unless perhaps they are reading a novel. When they want information, they tend to go to that information as fast as they can. This is the standard approach most people follow in using the internet. People don’t read the internet. Nor generally do they read a corporate website from beginning to end. That would be bizarre!

But yet, we provide annual reports in paper or PDF form, which extend to around 150 pages and often more, of difficult, often technical, material and expect people to read them. It doesn’t happen. Professional analysts might, but they are more likely to employ analytical tools to get the information they need.

There is an excellent article on the website of the International Federation of Accountants (IFAC) by Amir Ghandar, titled “The Accounting Revolution Will Be Digitized”.^[1] In that article, Mr Ghandar points out that “A 2D, static annual report format in paper or pdf is not that different to the papyrus on which Egyptian scribes reported on the royal inventories more than 7,000 years ago.”

Much more than this is needed in the modern world. Technology and complexity have advanced tremendously and the style of reporting needs to keep pace.

Two areas need further work. One involves the steps necessary to encourage legislators and regulators in countries to adopt digital reporting. While a majority of countries have adopted it, there is still a number who haven’t. Then there is the need to take the steps to change digital reporting to make it more understandable and usable to the users. This means providing the resources for them to actually draw out the data they want. These resources need to be made available along with the reports themselves. Some companies in their websites have started doing this, through the provision of data banks and some analytical tools, however it needs to become commonplace and much more powerful and sweeping.

Developing this approach to corporate reporting requires interaction and discussion between corporate reporters and users, regulators and standards-setters to address the issues.

Those issues involve more than figuring out how to present digital information and how to use it. It involves determining what information to present, how to present it and when. It involves looking back at the basic tenets that have ruled accounting since its beginnings. The need for annual and other periodic reports. Can they be continuous? Can we eliminate the need for those pesky annual accounting judgements that cause so much trouble? Can we include the tools for analysis within the disclosures rather than relying on the software industry to deliver them? This cannot be accomplished within paper or pdf reports, but rather on the corporate websites. Most companies have moved their reporting to their websites. But they generally have ported over the old paper paradigm, rather than seriously adopting new and innovative ways to report in the information age. It’s well past time we did that.

https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/accounting-revolution-will-be-digitized

^[1] https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/accounting-revolution-will-be-digitized

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